Five reminders about conducting background checks under federal and California law

Based on last week’s post about the lawsuit filed against LinkedIn alleging that it violated the federal Fair Credit Reporting Act (FCRA), I thought it would be good to point out a few issues the arise when employers conduct background checks. This article is not comprehensive, and this area of the law is very detailed, but the article is to remind employers to use caution when implementing these policies, as the exposure for violations could be huge.

1. Treat everyone equally.

If an employer makes the decision to obtain background reports for applicants or employees, the practice of obtaining the reports needs to be uniformly applied. Simply by complying with the federal and state requirements for background reports and credit checks does not shield an employer from discrimination claims or other claims that the practice used by the employer is illegal.

2. California employers can only conduct credit checks (which are different from background checks) for certain types of employees.

3. If using a third-party to perform the background check, federal and state law must be complied with.

Generally speaking, three applicable laws apply to California employers who perform background checks: the federal Fair Credit Reporting Act (FCRA), California Investigative Consumer Reporting Agencies Act (ICRAA), and the California Consumer Credit Reporting Agencies Act (CCRAA). Just as the three names of the statutes indicate, the laws are complex and are very detailed. For example, the FCRA defines a “consumer report” as “any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for…employment purposes….” Alternatively, California’s ICRAA uses the term “investigative consumer report”, and this pertains to generally the same items as the FCRA but not credit reports. California’s CCRAA applies to credit reports, and defines the term “consumer credit report” to refer to credit reports and credit worthiness of an employee. As one can easily see, the interaction of these three laws becomes very complex, and is not an area that most employers feel comfortable wading into without experienced legal counsel.

The laws generally require employers to:

Obtain written authorization from the employee to conduct the background check

Provide notice about background checks

If taking an adverse employment action based on the information obtained through the background check, additional notices must be provided to the employees.

After the adverse employment action has been taken, the employer must provide certain information to the employee, such as:

The employment decision was taken because of the information in the report

The name, address, and phone number of the company that compiled the report

The company that compiled the report did not make the hiring decision, and

That the employee has the right to dispute the accuracy or completeness of the report, and to get an additional free report from the reporting company within 60 days.

As explained above, California employers can only perform credit checks for a very limited set of positions, and cannot perform a credit check on every employee. In addition, the CCRAA requires additional disclosures to the employee if a credit check is performed. See Cal. Civ. Code section 1785.20.5.

4. Even if conducting a background check in-house, if an employer searches public records, these records must be disclosed to the employee within seven days.

Generally, if the employer conducts the background checks itself, the FCRA, ICRAA and CCRAA do not apply to the process. One exception to this rule is that the ICRAA requires that if the employer searches “public records” the employer must produce a copy of the public record to the employee within seven days of receiving the information (this applies to records received either in written or oral form). “Public records” are defined as “records documenting an arrest, indictment, conviction, civil judicial action, tax lien, or outstanding judgment.”

5. Employers are required to provide certain notice to the third-party conducting the background check.

Employers using outside credit reporting agencies must provide a certification to the reporting agency that the employer obtained the permission from the applicant/employee to obtain a background report, complied with the FCRA, and does not discriminate against the applicant or employee or otherwise use the information for an illegal purpose.

This is a very brief and general introduction to the laws that apply to background checks in the employment setting. Here are some resources for employers to learn more about their requirements under federal law:

The interaction between the federal FCRA, and California’s own requirements under the ICRAA and CCRAA adds another level of complexity to the analysis. It is important for employers to review these laws closely to ensure compliance, and it is highly recommended to have experienced legal counsel review the practices.